NACFB: Getting over over-development

This is an argument I was having recently with one of our patrons. I was making the observation that anecdotes and individual case studies can be used to show anything you’d like them to show.

The more business you do, the wider the variety of case studies you can call on to back up a particular point. It’s hard to see the big pointillist picture when you’re focused just on the dot of white or red paint that you’re dealing with at the time.

Common problem

My antagonist friend argued that so long as a case study is used to demonstrate a common problem, it’s fair game. We talked about the Nine Elms development, which he was calling over-development.

At Nine Elms, 28% of the completed unsold properties have been on the market for more than one year. Nearly three quarters of the properties that had sold went for less than the asking price.

As a case study, this sounds more like a fairy story; a region of London where property prices are in jarring decline comes across as a kind of fabled Narnia, deeply unlike the world we know and live in, populated by talking beasts. Yet it’s true: selling prices across the SW8 postcode reportedly fell by 7% during 2015.

If you’re in an area of easy mobility (and nowhere’s more connected within itself than London), people will move to where their quality of life is best. It all means that you don’t find “too good to be true” properties.

What’s happening at Nine Elms looks at first glance like hubris; assuming the market was hungry enough to welcome a feast, the developers have put more on the table than their guests can eat.

Eighteen thousand new houses are just the start – and as long as your property sales are relying on the current trend of foreign investment from the Far East, they are at the mercy of exchange rate tides, rising and falling as unstoppably as the river this mile-long building site overlooks.

Fallacies

That last point is the one that gives the lie to the notion that this is true over-development. There was a kind of inevitability about this part of London – anyone who’s flown over it will have seen, in an area that’s perfect for city workers, acres of flat ground-level car parking, without many cars on it. To say this is over-development is to suggest that there are better things to have done with that land. We might look back on this in five years’ time and come to the more sympathetic conclusion that the idea was spot on, but the timing was not. That’s a different matter from straightforward over-development.

Affordability

This also brings us to affordability. If foreign investors from China are drawing their horns in, that’s an issue of nationwide affordability. If individuals are constrained by, say, changes to stamp duty, that affects individual affordability.

NACFB patron Shawbrook Bank’s CEO, Steven Pateman, recently gave an interview in which he claimed that some banks are failing to take sufficient care over affordability checks. They are reportedly not ensuring that borrowers can make interest repayments if rates go up. The practice of lending high loan-to-values and basing affordability tests on today’s payment rates, “is like shutting your eyes and hoping for the best.”

Stress testing

What I suggest we are seeing is a kind of real-life “stress test”: not just overdevelopment, or pushing the risk profile too far, or losing investors due to exchange rate fluctuations and pre-referendum uncertainty, but a combination of all the above, nibbling away at the broadly healthy economy. If the market were to catch a cold, it wouldn’t be down to any one reason, which is a problem in itself, because it means the government can’t look at any one issue and say “that’s what’s holding property development back – let’s fix it!”

One thing is for sure, and it’s a variation on the “funding is out there” message that I’ve been hammering home for the past five years or more.

There is no shortage of bridging lenders – so far from it, in fact, that a couple of NACFB members have held our feet to the fire saying we are taking on too many.

I disagree – my definition of “too many” would be when lenders try to fit themselves into the lending space by taking a reckless approach to risk, and Shawbrook’ warnings don’t match the profile of any NACFB patron.

Or “too many” might be when brokers are confused by too many lenders offering identical products in all the same places. That would constitute “too many”. But we had a noticeable influx of bridging lenders in 2012 and we are seeing it again over the past eight months. I could speculate on why that might be the case, but I’ll save that for next month!